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Financial Planning > Tax Planning > Tax Reform

Tax Hike Proposals Likely

By Arthur D. Postal

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Life insurance industry lobbyists and lawyers believe that several proposals for tax increases affecting the industry will be included in the proposed budget for 2013 that the Obama administration will unveil Feb. 13.

Officials of the Association for Advanced Life Underwriters (AALU) believe that the administration’s proposed budget will again include provisions affecting Corporate-Owned-Life- Insurance (COLI) and insurers’ dividend received deduction for separate account products (DRD).

“If so, the AALU and the broader industry will again work vigorously to combat such proposals by successfully educating legislators about the critical benefits provided by life insurance products and insurers,” AALU officials said.

At the same time, these officials believe that it will not be until the lame duck session of Congress after the election that the fate of the Bush tax cuts, which expire at the end of the year, will be decided. These include the details of the estate tax going forward.

Officials at the AALU “anticipate” that “much of the action around the estate and gift taxes will occur late in the year, perhaps after the November elections.”

Currently, if the Bush tax cuts are not extended, the estate tax reverts as of January 2013 to $1 million, and a 55 percent tax rate.

Also at stake is unification of the gift and estate taxes, which were included in the late 2010 tax package.

Another issue is portability. Under the 2010 tax law, a married couple can take full advantage of the couple’s combined $7 million estate tax exemption without creating a trust.

 Only the retirement provisions of the Bush tax cuts will remain intact unless there is congressional action this year, according to William Sweetnam, a lawyer at the Groom Law Group in Washington, D.C.

They were made permanent by the Pension Modernization Act of 2006, Sweetnam said.

He said that these provisions, including increasing the limits on contributions to retirement plans; creating the Roth 401 (k); and adding a catch-up provision on retirement plans for those over 55, were made permanent in the 2006 Pension Protection Act.

Sweetnam helped implement the Bush tax cuts while at the Treasury Department.

He said the administration has delayed proposing its 2013 budget because it plans to propose changes in the current tax system and that it is taking Treasury Department officials some time to write these proposals.

“If you listened to the State of Union address, it is clear they will be proposing a lot of new legislation, and delaying disclosure until Treasury officials can prepare a detailed list of tax proposals.

“These are going to be very complex; that is why they need the extra time,” Sweetnam said.

Sweetnam suggests that amongst the proposals will be one for a millionaire’s tax.

As for the Bush tax cuts, Sweetnam said that if a Republican wins the presidency, and win both the House and Senate, there will be less of a likelihood that something is done in the lame duck session because Republicans will have much more flexibility if they will be in control in 2013.

“But, if Obama wins, the Republicans in Congress will try to make some sort of deal. Obama has always said that you shouldn’t allow the Bush tax cuts to go away for those making less than $250,000, so, I think all we will see a lot of discussions, and political rhetoric about what you do with taxes for upper income people,” Sweetnam said.

Sweetnam said that this year, the so-called “Buffett rule,” and reducing tax benefits from the IRS code will likely be introduced by Senate Democrats.

“Congress won’t implement these, but they will be political issues during the fall campaign,” Sweetnam said.

The Buffet rule, proposed by Obama last year, is designed to reduce income inequality in the U.S. between the top 1 percent and the rest of the population.

The tax plan would apply to individuals earning more than $1 million per year; this comprised the top 450,000 of Americans by income when the rule was proposed.

AALU officials agree. They said consideration of fundamental tax reform will be the subject of a number of hearings, study and preparation this year in advance “of what we expect to be a legitimate effort to reform the individual and/or corporate tax codes in 2013.”

Sweetnam acknowledged that it is “very difficult for a tax lawyer to know what to advise his clients to do right now.” 

Christopher Bergin, president and publisher of the non-profit Tax Analysts, which, among other things produces Tax Notes, a highly-regarded online publication that analyzes complex tax issues, has a similar view.

“The fate of the Bush tax cuts is the question I get all the time from people who represent high wealth clients,” Bergin said.

However,  “It is just not high on the Washington radar screen as we argue about bad tax policy ideas, like extending the payroll tax cut, which if we keep extending will likely have an important negative impact on Social Security.”

The fate of the Bush tax cuts, as well as all other components of tax policy, he said, is, however, the “canary in the mine. The tax system, including the estate taxes, are the poster child for a broken political process.”

He said tax practitioners, including those that advise small businesses, are at the end of the line in the Washington political process.

“How are they going to advise clients about an unfair, immensely complex, and economically inefficient tax?” Bergin asks.

“Given the lack of incentive for Congress to deal promptly with the expiring tax cuts, the alternative minimum tax and the tax extenders, you can now add a fourth problem with our current tax-writing policy—it’s temporary,” Bergin said.

“How do you plan for that?” he asks. “It’s madness.”

He said readers of insurance publications sit in the center of the storm, along with small businesses.

“No one has an answer for them, and it is a horrible situation,” Bergin said.

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